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(Bloomberg opinion) – The saving grace of the European Central Bank is the continued deterioration of the euro. Policy makers have more time to assess how accommodating this is – but they must be careful not to waste this asset.
The euro zone economy is slowing rapidly and it is the export-oriented countries that are suffering the most. Keeping the currency near the 1.25 against the dollar, as was the case last year, is essential to ensure a sustainable recovery. The slowdown of the past year can be paralyzed at the foot of the currency too strong in 2017 and the first half of 2018. It is therefore clear that the expectations of recovery of the ECB by the ECB will keep the currency down.
By June, eurozone rates will be negative for five years, but it is difficult to see real benefits. Underlying inflation fell further to stand at 0.8%, which is a far cry from the ECB's target, which was below 2% but close to it. . The Italian government should lower its growth forecast for 2019 to only 0.1%. The German manufacturing PMI dropped to 44.1 in March, bringing the country's top five research institutes to reduce their growth forecast for 2019 from 1.9% to 0.8%.
The ECB has never been able to restore some normalcy in its monetary policy after the trauma of the last decade. There is not much room for change to help a struggling economy. A weak euro is a part of this work for them, so the bank must recognize that the best help available to him is to keep the tailwind of a beautiful currency soft and stable in the background .
However, President Mario Draghi will have explanations to give at the press conference on April 10. He said on March 27 that the ECB should evaluate new measures to preserve the benefits of negative rates while mitigating side effects. This has been seen by the markets as a new turning point, which has brought the euro down to its lowest level in two years.
His colleagues are not exactly on board. Such an approach raises fears of a prioritization of deposit rates, which is not easy to sell. The day after Draghi's speech, outgoing chief economist Peter Praet reacted by stating that any change needed to benefit from a sound monetary policy. And the president of the Dutch central bank, Klaas Knot, said the ECB should "stay away". As usual, an internal battle is underway, the hawks not wanting to be dragged by another relaxation of their policy. The dispute here threatens to destroy the musical atmosphere that keeps the currency at a level that can prevent economies from sinking into recession.
Disagreements could also break out on another front. To avoid a credit crunch, the ECB needs to replace the targeted long-term refinancing operations that will soon come to an end. If the prioritization is difficult, imagine linking TLTROs (which mainly benefit the weakest banks) to any increase in the deposit rate (more closely related to the profitability of the stronger German, French and Dutch banks). This could create a real war of words – further compromising the euro.
The last thing Europe needs is a serious political divide. This Draghi will leave office in six months and his replacement has not been named, this only adds to the fragility of communications from Frankfurt. Hopefully, the leaders will take care of this gift that was given to them.
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